Author: Ivanhoff

MarketSmith powers the charts in this video.

All major indexes closed above their 20 and 50dma. Breakouts are following through for the most part – especially after earnings gaps and in high-momentum stocks. This is bullish. Nothing goes straight up. It is completely normal to see some backing and filling, some consolidation or a pullback after Labor Day weekend. As long as the indexes keep closing above their 50 and 20dma, the bulls are in charge which means that dips in strong stocks are likely to be bought.

Tech stocks started to move in tandem with interest rates again. As rates pulled back in the last couple of weeks, tech stocks rallied. As rates bounced on Friday, tech stocks faded. Even if tech takes a break here, it seems the market is more likely to correct through sector rotation as opposed to a wide-spread selling. The slack in tech on Friday was picked up by energy and metal sectors, which perked up. When those sector rally, tech is typically under pressure.

Chinese ADRs rallied again as China is injecting liquidity to jump-start its economy and stock market. It seems they are not worried about inflation over there at all. The China Internet ETF, KWEB is still a mess technically speaking but it is something I am keeping a close eye on. I traded FUTU, XPEV, BIDU during the week. FUTU weekly Calls went up 11x. 

In the meantime, high-yield stocks are getting smoked. Consumer staples and utilities are having one of their worst year in a while. People are not searching for yield in stocks anymore as Treasuries and shorter-term government bonds offer plenty of yield currently.

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MarketSmith powers the charts in this video.

The S&P 500 and the Nasdaq Composite rallied to their 50 and 20-day moving average where they were rejected. This could be the beginning of a new leg lower or at the very least more choppiness in the coming days. The gap and fade in Nvidia are not helping the Bulls’ case either. They just had one of the best earnings reports in their history and couldn’t hold their gains. Many stocks tend to top when they sell on good news. I am not looking for a top in Nvidia. The stock is still above its 20 and 50-day moving average and it is still in a clear uptrend but I am not looking to enter it right now either. 

A major source of active traders’ edge comes from using tight stops. Tight stops allow for small losses and winners that are much bigger than the losers. It is challenging to swing trade stocks with tight stop losses during volatile, choppy tapes. It is almost guaranteed that you will get shaken out. Small losses can accumulate fast even if you use a relatively small position size. Drawdowns lead to frustration and a loss of confidence. This is why it is so important to be aware of the market environment and what works in it. Keeping a large cash position, trading less, and using a smaller position size is not a bad approach for many here. If you have to trade, intraday makes the most sense currently because it is easier to find tight-stop entries and good risk-to-reward setups. If you prefer swing trading, consider using options to buy premium. The beauty of options is that you know exactly how much you have at risk – usually the entire premium. This provides you with staying power – you are less likely to get shaken out. It doesn’t matter if the market gaps against you. The most you can lose is the size of your premium. This is why you manage risk in options via proper position sizing. If you assume your risk is x, you will either lose x if wrong or make multiples of that if right. 

The tape remains volatile with a clear distribution under the surface. Most of the momentum stocks that had held relatively well in the past few weeks are getting hit one by one. If you are hiding in names showing relative strength, it hasn’t been working that great in this choppy tape which tells me that this correction might have more downside room. The stocks that are outperforming on green market days tend to be the ones from the bottom of the pit or highly-shorted names. We should see leaders starting to outperform if the correction is coming to an end. Many of the leaders are usually on my Momentum 40 list.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts have done.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.

MarketSmith powers the charts in this video.

We saw more distribution days last week. Most stocks went down via gradual, slow-motion selling. We haven’t really witnessed any panic selling that tends to mark short-term bottoms. Market breadth reached oversold levels last Friday. Most stocks gapped down on Friday after being down several days in a row. As expected, that gap faded. The fact that the indexes are in a correction is now evident to everyone. More people are turning bearish which means that we might see a quick bounce to shake out all the bearishness. 

If this is just a garden-variety correction within a bull market (which I believe it is), it makes sense to compare it to what happened in February/March of this year. That pullback started just when the market became a bit euphoric after a big run in January. The correction had two legs lower intercepted by a big bounce towards SPY’s 20dma. On the first leg lower, almost all stocks got hit. Then most had a big 3-day bounce to their 20-day moving average. During the second leg lower, some stocks (especially in tech) went sideways, showing relative strength. The moment the correction was over and the indexes bounced, those tech stocks outperformed significantly. I am not saying that this is the way the current correction will play out and what the duration of which leg will be, but it is a decent map to keep in mind. A notable difference this time is that all major indexes are below their 50-day moving average. QQQ never closed below its 50dma back in March. 

Nvidia (NVDA) reports earnings on Wednesday afternoon. It has been the biggest leader so far in 2023. My guess is that this bull market won’t be over until NVDA is hit hard which is not very likely to happen at this point in time. The last time Nvidia reported, on May 24th, they crushed estimates, raised guidance and kick-started a big rally in the tech sector. The stock is up 200% year-to-date so a lot of the good news might be already discounted in its price. Every momentum investor owns it, so any significant dip is likely to get initially bought. If it gaps up, I would not be surprised to see it fade as people rush to take partial short-term profits.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.